Today on Monday, May 11th, 2020, something significant will have happened with Bitcoin: the halving. You’ll likely hear the term bandied around quite often in the coming days. This article is meant as an in-between primer, with the beginning touching on some introductory points for a more general audience, and the later points touching on more nuanced implications for people who know the basics.
1) The halving is a planned part of one of Bitcoin’s central tenets: controlled money supply and deflationary economics
One of the first things to know about Bitcoin is that it is built around a controlled supply. A limit of 21 million Bitcoins has been set from the beginning. The idea is to counter the notion of inflationary economics and specifically unconventional monetary policy, which through quantitative easing (in the United States, for example) or negative interest rates (in Europe, for example) is inflating the monetary base through a combination of asset creation and fractional reserve.
How does the halving play into this?
Every time a block is mined, the miner gets rewarded with a block reward of Bitcoins. This is how Bitcoins are created. The majority of miner income now comes from block rewards as opposed to transaction fees.
Every 210,000 blocks or so, the reward for mining Bitcoin is projected to go down by 50%. The Bitcoin algorithm automatically adjusts mining difficulty (the amount of computational power required to solve problems to demonstrate proof-of-work and find a block) so that roughly six blocks are discovered by hour. This is so as the limit approaches 21 million Bitcoins mined, the amount of Bitcoins in circulation will always be slightly below 21 million. Halvings happen about once every four years: they’ve occurred before in 2012 and 2016.
In standard macroeconomic theory, deflation causes excess saving, which lowers aggregate demand and consumption. Many economists will point to the deflation present in Japan during the 90s as their case study for this topic. Yet, Bitcoin adherents tend to come from the technology community, where there has been an incredible deflation in terms of production costs that makes entrepreneurship easier. Moore’s law and the availability of cheap cloud computing resources has helped individual entrepreneurs be able to start meaningful businesses at scale. The two schools of thought counter one another here, and it’s important to realize that the halving is an important mechanism for Bitcoin’s argument for deflationary economics and controlled supply.
2) The current block reward of Bitcoins is 12.5 BTC per block. After the halving it will be 6.25 BTC per block.
As the name implies, the halving means the amount of Bitcoins per each block mined will be divided by half. From now on until sometime in 2024, Bitcoin miners will receive 6.25 Bitcoin for every block they mine, which is equivalent to about $62,500 USD as of the time of this writing. In 2024, that will be cut down by half again to 3.125 BTC per block.
3) Halving day in 2012 showed significant price movement after-the-fact, but it was little noticed. Halving day in 2016 moved markets in a way that was significantly amplified
Bitcoin ascended from about $11 USD to above $1,000 USD in 2013 after the 2012 halving event, then crashed down to a few hundred dollars. It was after the halving date in 2016 and during the 2017 run-up that Bitcoin hit $20,000 USD+ in pricing — and garnered significantly more attention than it had before.
4) Bitcoin miners will be affected by halving, though most will likely have planned for this event
The most immediate and predictable of economic consequences for the halving will be the consequences it will bring to the people who are mining blocks — the controllers of the hashrate that helps protect and discover Bitcoin blocks. They will immediately see a drop in their revenue if the price per Bitcoin doesn’t immediately adjust — as history tells us, it still takes time for the quantity and the price of Bitcoin to return to the same equilibrium. As a result, previous halving days have seen a decrease in hash rate across the blockchain as miners were disincentivized to find new blocks.
However, this date was foreseen — and miners now, in practice, are sophisticated corporations or organization and no longer individuals who have spare GPUs. It’s possible that the corresponding decrease will not be as large now that large investments have been made in fixed mining infrastructure in anticipation of a predictable halving date.
5) This is a very unique moment for a halving of Bitcoin
While both 2012 and 2016 were interesting markers, 2020 brings with it the post-COVID19 pandemic period — an economic recession that as of now, looks more like the Great Depression than the 2008-2009 Great Recession that first sparked Bitcoin in the first place.
Bitcoin’s core thesis will come to the test right when aggressive discretionary monetary policy around the world kicks off inflation of the money supply.
6) Other cryptocurrencies like Litecoin have halving as well — while they have different features, deflationary economics is at their core too
Bitcoin is not the only popular cryptocurrency that has halving features. Most cryptocurrencies have minor variations on Bitcoin’s theme, but most also have the same deflationary thesis at their core as well. The next Litecoin halving date, for example, will come around August, 6th, 2023.
The following website has a link to cryptocurrencies and their current block number, the specified halving block, and the approximate halving date.
7) Technically, the money supply of 21 million Bitcoins is more of an asymptote: the real principle behind the halving is a steadfast adherence to principles sett in code vs. arbitrary policy execution
The 21 million Bitcoin limit is technically really a rule that is mathematically derived and is not an exact figure. The last Bitcoin is projected to be mined according to the original rules by October 8th, 2140. However, the total spendable supply of Bitcoins is actually lower than the limit rule itself, which is also slightly below the exact figure of 21 million Bitcoins. Bitcoins can be destroyed in any number of ways or rendered unspendable: perhaps the easiest to think of is a Bitcoin wallet wherein the private key has been lost. There is also willful destruction of Bitcoin by sending them to invalid addresses.
Fundamentally, nothing technically precludes architecting a fractional-reserve system on top of Bitcoin as the current monetary system currently does on bank reserves or some hard fork or soft fork that could change some of the rules (for example, there might be a fork to set the limit to be exactly 21 million Bitcoins).
Why this is important?
The deflationary aspect of Bitcoin, while maintained by halving, is really a larger extension of the community cohering not only technically through nodes and consensus, but also ideologically.
To the extent that you can trust Bitcoin to keep to deflationary economics, you have to believe that no aggregative force behind Bitcoin nodes exists to coerce the chain to do otherwise, and that the community at large will largely live by these principles. The technical 21 million Bitcoin limit is not exact, and it can be subverted through non-technical means such as creating a fractional reserve system that varies on the Bitcoin monetary base — the adherence of the community to the deflationary economics currently set in the code is what really guarantees Bitcoin standing in stark contrast to inflationary economics.